Russia & Turkey: Trying to Revive Economic Cooperation

The renowned economist John Kenneth Galbraith once said that “politics is the art of choosing between the disastrous and the unpalatable.” Such an outlook may have played a role in encouraging Turkey and Russia to set aside mutual animosity and try to get back to business.

In early August, Turkish President Recep Tayyip Erdoğan and his Russian counterpart Vladimir Putin shook hands in front of reporters in St. Petersburg. Such a meeting would have been hard to imagine just a couple of months earlier.

At that August meeting, a somewhat haggard-looking Erdoğan thanked Putin for his support amid the failed coup d’état in Turkey a few weeks before. Meanwhile, the Russian president darted suspicious glances at Erdoğan, perhaps recalling how dramatically their relations had deteriorated after a Russian military aircraft was shot down by Turkish jets along its border with Syria in November last year. At a subsequent news conference, the two leaders vowed to repair bilateral ties and resume trade, as well as move forward with several ambitious economic development projects.

There are multiple factors underpinning the Turkish-Russian rapprochement. There is, of course, a geopolitical element. Over the last couple of years, both Russia and Turkey have lost a number of allies in the international arena, and are now in need of new ones.

Politically, there are many similarities in Putin’s and Erdoğan’s authoritarian leadership styles. This common ground, and possibly even some degree of mutual sympathy, might have encouraged the two leaders to gravitate back towards each other.

But there is another very important consideration: the breach in relations threatened to upend several extremely lucrative construction projects. The presidents have already agreed to resume the two largest construction projects that were put on hold after the shoot-down – Turkish Stream and the Akkuyu Nuclear Power Plant.

But to what extent will both countries benefit from them, and what does the future hold for trade between Russia and Turkey?

Turkish Stream is a natural gas pipeline that will run across the Black Sea, a project that Putin and Erdoğan announced in December 2014. This happened shortly after the decision to abandon South Stream, a similar initiative for the supply of Russian gas to Eastern Europe, but via Bulgaria rather than Turkey. During their St. Petersburg meeting in August, both presidents announced that Turkish Stream would resume shortly. However, Russian officials later specified that the agreement concerns the construction of a pipeline connecting Russia and Turkey (with a completion date not earlier than December 2019), and not an extension to deliver Russian gas to EU countries. This extension appears to be subject to additional negotiations between Russia, Turkey and the European Union.

If these talks get stuck, Turkish Stream – which had originally been designed to make Turkey both a customer and transit country – may turn out to be unprofitable for Russia.

The other project to which Putin and Erdoğan gave the green light – the Akkuyu Nuclear Power Plant in Turkey’s Mersin Province – has also been subject to criticism since its launch in 2010. A number of observers have voiced concerns that Russia was taking unnecessary risks associated with the construction. Quite unusually for this type of project, the Russian government has assumed responsibility for its financing (through a $20 billion loan), as well as its implementation, which is being handled by the nuclear state entity, Rosatom.

It is interesting to note that in 2012 the Russian Institute of Energy released a study concluding that the project is not in the country’s economic interests. The project is also at odds with Russia’s usual principle of never building nuclear plants in countries that purchase Russian natural gas.

The Akkuyu plant has faced criticism in Turkey as well, primarily on environmental grounds. There also has been grumbling in Turkish media about the supply arrangement, which stipulates a fixed price of $0.1235 per kWh for power energy generated at the plant for Turkish customers over the next 25 years. Some observers contend that the price is too high.

Meanwhile, this fixed-price arrangement has also faced criticism in Russia because it does not take into account inflation, currency devaluation and other risks. The first unit of the power station was originally scheduled to start operations in 2020.

These two large projects, especially the Akkuyu Nuclear Power Plant, are first and foremost political investments by the Kremlin that are designed to pay political dividends. The next few years should show whether such dividends will match original expectations. Setting these aside, the easing of tensions between Russia and Turkey is likely to help tourism and other interstate trade to return to pre-crisis levels within about six months.

It is important to remember, however, that no matter how large the trade figures are, politics will continue to dominate Russian-Turkish relations. Thus, trade and business ventures are vulnerable to sudden changes in the geopolitical landscape.

Syrian affairs will be a key area to watch. Turkey’s late August military intervention in northern Syria threatens to upend a delicate balance of interests among the various parties involved in the conflict there, including Russia. In this light, a rise in tension between Russia and Turkey in Syria (or elsewhere) could quickly scuttle the revival of bilateral trade and cooperation.

Editor's note:

Dmitry Sachkov is an expert on Eurasian affairs at The Risk Advisory Group, a global risk management consultancy that has offices in Washington DC, London, Moscow, Al Khobar, Dubai and Hong Kong.